Government Money Creates Minefield for GM IPO

The impact of the U.S. government's bailout of General Motors Co is showing up in strange places, including as a conflict with one of the four lead underwriters on the automaker's planned initial public offering.

The U.S. government — the main seller in GM's IPO — is also a part owner of Citigroup Inc, which has landed a lead underwriting slot on the IPO. In this case, the U.S. Treasury owns 61 percent of GM and as of Sept. 30 owned a 12.4 percent stake in Citigroup's common stock.

The conflict is unlikely to have a major impact on the IPO but is significant enough to have been flagged in a regulatory filing. Its disclosure highlights just how complicated the government's exit from GM and the financial sector will be.

Lawyers for GM declined to comment or did not return calls for comment. GM, Treasury and Citi declined comment.

"Maybe a government bailout is a good idea but it comes with attendant complexities and problems that are somewhat unprecedented and require extra special attention to detail," said David Martin, partner and co-head of Covington & Burling LLP's securities practice.

Martin spent seven years at the U.S. Securities and Exchange Commission, serving part of that time as director of the division of corporate finance.

One example of the difficulty in putting together the GM IPO is the fact that this conflict was not mentioned earlier.

It is possible that because GM and Citigroup have a common owner, rather than direct ownership in one another, the company failed to consider the possible conflict earlier. Often, conflicts arise from one company directly owning another instead of both having a common owner, said Gregg Berman, partner and vice chair of Fulbright & Jaworski LLP's securities practice.

"I'm not sure when people are doing a registration statement for a third party like General Motors that they are thinking, 'My goodness, Citi is also a ward of the state and consequently we need now to worry about this conflict of interest,"' Berman said.

DISCRETIONARY ACCOUNTS

The U.S. government poured $50 billion into GM in exchange for a 61 percent stake to keep the top U.S. automaker from liquidation through bankruptcy.

Citigroup also tapped government coffers; massive losses on soured loans forced Citigroup to take a record $45 billion in U.S. taxpayer funds.

Treasury's stakes in both GM and Citi mean that the conflict must be disclosed and Citi must obtain prior written permission before purchasing GM IPO shares through certain accounts.

The accounts in question, called "discretionary," allow a broker to buy and sell on behalf of the account owner without obtaining permission for individual transactions. An example might be a wealthy client who allows her broker to buy and sell equities without seeking permission for every transaction.

However, discretionary accounts are not typical IPO buyers and GM in its S-1 filings has said that the underwriters do not intend to sell more than 5 percent of common shares or more than 5 percent of preferred shares to discretionary accounts.

The impact of the U.S. government's bailout of General Motors Co is showing up in strange places, including as a conflict with one of the four lead underwriters on the automaker's planned initial public offering.
The U.S. government the main seller in GM's IPO is also...